10-Q 1 a18-40981_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 2018

 

o  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM              TO

 

Commission File No. 001-31298

 

LANNETT COMPANY, INC.

(Exact Name of Registrant as Specified in its Charter)

 

State of Delaware

 

23-0787699

(State of Incorporation)

 

(I.R.S. Employer I.D. No.)

 

9000 State Road

Philadelphia, PA 19136

(215) 333-9000

(Address of principal executive offices and telephone number)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x No o

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

 

 

Emerging growth company o

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12B-12 of the Exchange Act).  Yes o No x

 

Indicate the number of shares outstanding of each class of the registrant’s common stock, as of the latest practical date

 

Class

 

Outstanding as of January 31, 2019

Common stock, par value $0.001 per share

 

39,286,744

 

 

 


Table of Contents

 

Table of Contents

 

 

Page No.

PART I. FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

 

 

 

Consolidated Balance Sheets as of December 31, 2018 (unaudited) and June 30, 2018

3

 

 

 

 

Consolidated Statements of Operations (unaudited) for the three and six months ended December 31, 2018 and 2017

4

 

 

 

 

Consolidated Statements of Comprehensive Income (Loss) (unaudited) for the three and six months ended December 31, 2018 and 2017

5

 

 

 

 

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) for the three and six months ended December 31, 2018 and 2017

6

 

 

 

 

Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2018 and 2017

8

 

 

 

 

Notes to Consolidated Financial Statements (unaudited)

9

 

 

 

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

33

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

46

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

46

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

47

 

 

 

ITEM 1A.

RISK FACTORS

47

 

 

 

ITEM 6.

EXHIBITS

47

 

2


Table of Contents

 

PART I.  FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

LANNETT COMPANY, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

 

 

 

(Unaudited)

 

 

 

 

 

December 31, 2018

 

June 30, 2018

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

163,774

 

$

98,586

 

Accounts receivable, net

 

275,364

 

252,651

 

Inventories

 

136,128

 

141,635

 

Prepaid income taxes

 

 

15,159

 

Assets held for sale

 

11,422

 

13,976

 

Other current assets

 

7,958

 

4,863

 

Total current assets

 

594,646

 

526,870

 

Property, plant and equipment, net

 

195,607

 

233,247

 

Intangible assets, net

 

409,870

 

424,425

 

Goodwill

 

 

339,566

 

Deferred tax assets

 

100,013

 

22,063

 

Other assets

 

19,320

 

29,133

 

TOTAL ASSETS

 

$

1,319,456

 

$

1,575,304

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

 

$

60,178

 

$

56,767

 

Accrued expenses

 

7,283

 

7,425

 

Accrued payroll and payroll-related expenses

 

15,545

 

7,819

 

Deferred revenue

 

23,998

 

 

Rebates payable

 

44,384

 

49,400

 

Royalties payable

 

9,615

 

5,955

 

Restructuring liability

 

5,693

 

6,706

 

Liabilities held for sale

 

1,204

 

 

Settlement liability

 

8,000

 

 

Income taxes payable

 

1,346

 

 

Short-term borrowings and current portion of long-term debt

 

66,845

 

66,845

 

Total current liabilities

 

244,091

 

200,917

 

Long-term debt, net

 

746,607

 

772,425

 

Other liabilities

 

2,247

 

3,047

 

TOTAL LIABILITIES

 

992,945

 

976,389

 

Commitments and Contingencies (Note 12 and 13)

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS’ EQUITY

 

 

 

 

 

Common stock ($0.001 par value, 100,000,000 shares authorized; 38,766,807 and 38,256,839 shares issued; 37,822,927, and 37,380,517 shares outstanding at December 31, 2018 and June 30, 2018, respectively)

 

39

 

38

 

Additional paid-in capital

 

312,322

 

306,817

 

Retained earnings

 

29,016

 

306,464

 

Accumulated other comprehensive loss

 

(502

)

(515

)

Treasury stock (943,880 and 876,322 shares at December 31, 2018 and June 30, 2018, respectively)

 

(14,364

)

(13,889

)

Total stockholders’ equity

 

326,511

 

598,915

 

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY

 

$

1,319,456

 

$

1,575,304

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

3


Table of Contents

 

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except share and per share data)

 

 

 

Three months ended

 

Six months ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net sales

 

$

193,718

 

$

184,305

 

$

348,772

 

$

339,266

 

Cost of sales

 

115,751

 

88,914

 

203,441

 

168,467

 

Amortization of intangibles

 

8,157

 

7,941

 

16,380

 

15,678

 

Gross profit

 

69,810

 

87,450

 

128,951

 

155,121

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Research and development expenses

 

9,723

 

10,722

 

19,533

 

18,131

 

Selling, general and administrative expenses

 

23,197

 

28,493

 

43,785

 

47,531

 

Acquisition and integration-related expenses

 

 

65

 

 

83

 

Restructuring expenses

 

213

 

1,035

 

1,235

 

1,562

 

Asset impairment charges

 

 

 

369,499

 

 

Total operating expenses

 

33,133

 

40,315

 

434,052

 

67,307

 

Operating income (loss)

 

36,677

 

47,135

 

(305,101

)

87,814

 

Other income (loss):

 

 

 

 

 

 

 

 

 

Investment income

 

556

 

2,325

 

935

 

3,489

 

Interest expense

 

(21,512

)

(20,686

)

(42,945

)

(41,598

)

Other

 

(712

)

3,386

 

(1,008

)

3,135

 

Total other loss

 

(21,668

)

(14,975

)

(43,018

)

(34,974

)

Income (loss) before income tax

 

15,009

 

32,160

 

(348,119

)

52,840

 

Income tax expense (benefit)

 

2,647

 

18,138

 

(72,953

)

25,561

 

Net income (loss)

 

$

12,362

 

$

14,022

 

$

(275,166

)

$

27,279

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

 

 

 

 

Basic

 

$

0.33

 

$

0.38

 

$

(7.30

)

$

0.74

 

Diluted

 

$

0.32

 

$

0.37

 

$

(7.30

)

$

0.72

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

37,761,176

 

37,066,902

 

37,674,200

 

37,029,483

 

Diluted

 

39,112,547

 

38,290,358

 

37,674,200

 

38,087,826

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

4


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LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)

(In thousands)

 

 

 

Three months ended

 

Six months ended

 

 

 

December 31,

 

December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

12,362

 

$

14,022

 

$

(275,166

)

$

27,279

 

Other comprehensive income (loss), before tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation gain (loss)

 

7

 

(126

)

13

 

(125

)

Total other comprehensive income (loss), before tax

 

7

 

(126

)

13

 

(125

)

Income tax related to items of other comprehensive income

 

 

 

 

 

Total other comprehensive income (loss), net of tax

 

7

 

(126

)

13

 

(125

)

Comprehensive income (loss)

 

$

12,369

 

$

13,896

 

$

(275,153

)

$

27,154

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5


Table of Contents

 

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)

 

 

 

Three months ended December 31, 2018

 

 

 

Common Stock

 

Additional

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

Shares
Issued

 

Amount

 

Paid-In
Capital

 

Retained
Earnings

 

Comprehensive
Loss

 

Treasury
Stock

 

Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2018

 

38,665

 

$

39

 

$

310,135

 

$

16,654

 

$

(509

)

$

(14,295

)

$

312,024

 

Shares issued in connection with share-based compensation plans

 

102

 

 

237

 

 

 

 

237

 

Share-based compensation

 

 

 

1,950

 

 

 

 

1,950

 

Purchase of treasury stock

 

 

 

 

 

 

(69

)

(69

)

Other comprehensive income net of tax

 

 

 

 

 

7

 

 

7

 

Net income

 

 

 

 

12,362

 

 

 

12,362

 

Balance, December 31, 2018

 

38,767

 

$

39

 

$

312,322

 

$

29,016

 

$

(502

)

$

(14,364

)

$

326,511

 

 

 

 

Three months ended December 31, 2017

 

 

 

Common Stock

 

Additional

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

Shares
Issued

 

Amount

 

Paid-In
Capital

 

Retained
Earnings

 

Comprehensive
Loss

 

Treasury
Stock

 

Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, September 30, 2017

 

37,672

 

$

38

 

$

295,282

 

$

291,031

 

$

(221

)

$

(9,859

)

$

576,271

 

Shares issued in connection with share-based compensation plans

 

89

 

 

492

 

 

 

 

492

 

Share-based compensation

 

 

 

2,563

 

 

 

 

2,563

 

Purchase of treasury stock

 

 

 

 

 

 

(426

)

(426

)

Other comprehensive loss, net of tax

 

 

 

 

 

(126

)

 

(126

)

Net income

 

 

 

 

14,022

 

 

 

14,022

 

Balance, December 31, 2017

 

37,761

 

$

38

 

$

298,337

 

$

305,053

 

$

(347

)

$

(10,285

)

$

592,796

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

6


Table of Contents

 

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)

 

 

 

Six months ended December 31, 2018

 

 

 

Common Stock

 

Additional

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

Shares
Issued

 

Amount

 

Paid-In
Capital

 

Retained
Earnings

 

Comprehensive
Loss

 

Treasury
Stock

 

Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2018

 

38,257

 

$

38

 

$

306,817

 

$

306,464

 

$

(515

)

$

(13,889

)

$

598,915

 

Shares issued in connection with share-based compensation plans

 

510

 

1

 

520

 

 

 

 

521

 

Share-based compensation

 

 

 

4,985

 

 

 

 

4,985

 

Purchase of treasury stock

 

 

 

 

 

 

(475

)

(475

)

Other comprehensive income net of tax

 

 

 

 

 

13

 

 

13

 

ASC 606 adjustment

 

 

 

 

(2,282

)

 

 

(2,282

)

Net loss

 

 

 

 

(275,166

)

 

 

(275,166

)

Balance, December 31, 2018

 

38,767

 

$

39

 

$

312,322

 

$

29,016

 

$

(502

)

$

(14,364

)

$

326,511

 

 

 

 

Six months ended December 31, 2017

 

 

 

Common Stock

 

Additional

 

 

 

Accumulated
Other

 

 

 

 

 

 

 

Shares
Issued

 

Amount

 

Paid-In
Capital

 

Retained
Earnings

 

Comprehensive
Loss

 

Treasury
Stock

 

Stockholders’
Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2017

 

37,528

 

$

37

 

$

292,780

 

$

277,774

 

$

(222

)

$

(9,247

)

$

561,122

 

Shares issued in connection with share-based compensation plans

 

233

 

1

 

805

 

 

 

 

806

 

Share-based compensation

 

 

 

4,752

 

 

 

 

4,752

 

Purchase of treasury stock

 

 

 

 

 

 

(1,038

)

(1,038

)

Other comprehensive loss, net of tax

 

 

 

 

 

(125

)

 

(125

)

Net income

 

 

 

 

27,279

 

 

 

27,279

 

Balance, December 31, 2017

 

37,761

 

$

38

 

$

298,337

 

$

305,053

 

$

(347

)

$

(10,285

)

$

592,796

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

7


Table of Contents

 

LANNETT COMPANY, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

 

 

Six Months Ended
December 31,

 

 

 

2018

 

2017

 

OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

 

$

(275,166

)

$

27,279

 

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

28,622

 

27,354

 

Deferred income tax expense (benefit)

 

(77,950

)

22,169

 

Share-based compensation

 

4,985

 

4,752

 

Asset impairment charges

 

369,499

 

 

Loss on sale of assets

 

644

 

233

 

Loss (gain) on investment securities

 

 

(2,834

)

Amortization of debt discount and other debt issuance costs

 

8,934

 

9,987

 

Other noncash (income) expenses

 

(510

)

87

 

Changes in assets and liabilities which provided (used) cash:

 

 

 

 

Accounts receivable, net

 

(25,887

)

(52,662

)

Inventories

 

2,156

 

(12,987

)

Prepaid income taxes/Income taxes payable

 

17,516

 

15,040

 

Other assets

 

(678

)

(8,160

)

Accounts payable

 

3,701

 

28,913

 

Accrued expenses

 

(4

)

231

 

Accrued payroll and payroll-related expenses

 

8,501

 

11,203

 

Deferred revenue

 

23,998

 

 

Rebates payable

 

(5,016

)

3,786

 

Royalties payable

 

3,660

 

2,564

 

Restructuring liability

 

(1,013

)

(850

)

Settlement liability

 

8,000

 

 

Net cash provided by operating activities

 

93,992

 

76,105

 

INVESTING ACTIVITIES:

 

 

 

 

 

Purchases of property, plant and equipment

 

(12,030

)

(26,402

)

Proceeds from sale of property, plant and equipment

 

14,091

 

17

 

Proceeds from sale of outstanding loan to Variable Interest Entity (“VIE”)

 

5,600

 

 

Purchase of intangible asset

 

(2,000

)

(2,038

)

Proceeds from sale of investment securities

 

 

44,924

 

Purchase of investment securities

 

 

(42,841

)

Net cash provided by (used in) investing activities

 

5,661

 

(26,340

)

FINANCING ACTIVITIES:

 

 

 

 

 

Repayments of long-term debt

 

(33,422

)

(27,283

)

Proceeds from issuance of stock

 

521

 

806

 

Payment of debt issuance costs

 

(1,102

)

 

Purchase of treasury stock

 

(475

)

(1,038

)

Net cash used in financing activities

 

(34,478

)

(27,515

)

Effect on cash and cash equivalents of changes in foreign exchange rates

 

13

 

(125

)

NET INCREASE IN CASH AND CASH EQUIVALENTS

 

65,188

 

22,125

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

98,586

 

117,737

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

$

163,774

 

$

139,862

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

Interest paid (net of capitalized interest of $0 and $974 thousand for the six months ended December 31, 2018 and 2017, respectively)

 

$

34,190

 

$

31,250

 

Income taxes paid (refunded)

 

$

(11,993

)

$

(7,567

)

Credits issued pursuant to a Settlement Agreement

 

$

 

$

5,000

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

8


Table of Contents

 

LANNETT COMPANY, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 1.  Interim Financial Information

 

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for the presentation of interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X.  Accordingly, the unaudited financial statements do not include all the information and footnotes necessary for a comprehensive presentation of the financial position, results of operations and cash flows for the periods presented.  In the opinion of management, the unaudited financial statements include all the normal recurring adjustments that are necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.  Operating results for the three and six months ended December 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2019.  These unaudited financial statements should be read in combination with the other Notes in this section; “Management’s Discussion and Analysis of Financial Condition and Results of Operations” appearing in Item 2; and the Consolidated Financial Statements, including the Notes to the Consolidated Financial Statements, included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2018.  The Consolidated Balance Sheet as of June 30, 2018 was derived from audited financial statements.

 

Note 2.  The Business and Nature of Operations

 

Lannett Company, Inc. (a Delaware corporation) and its subsidiaries (collectively, the “Company” or “Lannett”) primarily develop, manufacture, package, market and distribute solid oral and extended release (tablets and capsules), topical, nasal and oral solution finished dosage forms of drugs that address a wide range of therapeutic areas.  Certain of these products are manufactured by others and distributed by the Company. The Company also manufactures active pharmaceutical ingredients through its Cody Laboratories, Inc. (“Cody Labs”) subsidiary primarily for use in its finished dosage forms.  In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business.  See Note 22 “Assets Held for Sale” for more information.

 

On November 25, 2015, the Company completed the acquisition of Kremers Urban Pharmaceuticals, Inc. (“KUPI”), the former U.S. specialty generic pharmaceuticals subsidiary of global biopharmaceuticals company UCB S.A. (“UCB”).  KUPI is a specialty pharmaceuticals manufacturer focused on the development of products that are difficult to formulate or utilize specialized delivery technologies.

 

The Company operates pharmaceutical manufacturing plants in Philadelphia, Pennsylvania; Cody, Wyoming; Carmel, New York and Seymour, Indiana.  The Company’s customers include generic pharmaceutical distributors, drug wholesalers, chain drug stores, private label distributors, mail-order pharmacies, other pharmaceutical manufacturers, managed care organizations, hospital buying groups, governmental entities and health maintenance organizations.  In the second quarter of Fiscal 2019, the Company ceased manufacturing functions at its State Road facility in Philadelphia, Pennsylvania.  The Company discontinued distribution from its Townsend Road facility in Philadelphia, Pennsylvania as of January 31, 2019.  The Company intends to sell its Townsend Road facility by the end of Fiscal 2019.

 

Note 3.  Summary of Significant Accounting Policies

 

Basis of Presentation

 

The Consolidated Financial Statements have been prepared in conformity with generally accepted accounting principles in the United States (“U.S. GAAP”).

 

Principles of consolidation

 

The Consolidated Financial Statements include the accounts of Lannett Company, Inc. and its wholly-owned subsidiaries.  All intercompany accounts and transactions have been eliminated.

 

Business Combinations

 

Acquired businesses are accounted for using the acquisition method of accounting, which requires that the assets acquired and liabilities assumed be recorded at the date of acquisition at their respective estimated fair values.  The fair values and useful lives assigned to each class of assets acquired and liabilities assumed are based on, among other factors, the expected future period of benefit of the asset, the various characteristics of the asset and projected future cash flows.  Significant judgment is employed in

 

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determining the assumptions utilized as of the acquisition date and for each subsequent measurement period.  Accordingly, changes in assumptions described above could have a material impact on our consolidated results of operations.

 

Use of estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates and assumptions are required in the determination of revenue recognition and sales deductions for estimated chargebacks, rebates, returns and other adjustments including a provision for the Company’s liability under the Medicare Part D program.  Additionally, significant estimates and assumptions are required when determining the fair value of long-lived assets, including goodwill and intangible assets, income taxes, contingencies and share-based compensation.

 

Because of the inherent subjectivity and complexity involved in these estimates and assumptions, actual results could differ from those estimates.

 

Foreign currency translation

 

The Consolidated Financial Statements are presented in U.S. Dollars, the reporting currency of the Company.  The financial statements of the Company’s foreign subsidiary are maintained in local currency and translated into U.S. dollars at the end of each reporting period.  Assets and liabilities are translated at period-end exchange rates, while revenues and expenses are translated at average exchange rates during the period.  The adjustments resulting from the use of differing exchange rates are recorded as part of stockholders’ equity in accumulated other comprehensive income (loss).  Gains and losses resulting from transactions denominated in foreign currencies are recognized in the Consolidated Statements of Operations under Other income (loss).  Amounts recorded due to foreign currency fluctuations are immaterial to the Consolidated Financial Statements.

 

Cash and cash equivalents

 

The Company considers all highly liquid investments with original maturities less than or equal to three months at the date of purchase to be cash and cash equivalents.  Cash and cash equivalents are stated at cost, which approximates fair value, and consist of bank deposits and certificates of deposit that are readily convertible into cash.  The Company maintains its cash deposits and cash equivalents at well-known, stable financial institutions.  Such amounts frequently exceed insured limits.

 

Investment securities

 

The Company’s investment securities consisted of publicly-traded equity securities which were classified as trading investments.  Investment securities were recorded at fair value based on quoted market prices from broker or dealer quotations or transparent pricing sources at each reporting date.  Realized and unrealized gains and losses are included in the Consolidated Statements of Operations under Other income (loss).  In May 2018, the Company liquidated the remainder of the investment securities portfolio.  As of December 31, 2018 and June 30, 2018, the Company does not own investment securities.

 

Allowance for doubtful accounts

 

The Company continuously monitors collections and payments from its customers and maintains a provision for estimated credit losses.  The Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time balances are past due, the Company’s previous loss history, the customer’s current ability to pay its obligations to the Company and the condition of the general economy and the industry as a whole.  The Company writes off accounts receivable when they are determined to be uncollectible.

 

Inventories

 

Inventories are stated at the lower of cost or net realizable value by the first-in, first-out method.  Inventories are regularly reviewed and write-downs for excess and obsolete inventory are recorded based primarily on current inventory levels, expiration date and estimated sales forecasts.

 

Property, Plant and Equipment

 

Property, plant and equipment are stated at cost less accumulated depreciation.  Depreciation is computed on a straight-line basis over the assets’ estimated useful lives.  Repairs and maintenance costs that do not extend the useful life of the asset are expensed as incurred.

 

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Intangible Assets

 

Definite-lived intangible assets are stated at cost less accumulated amortization.  Amortization of definite-lived intangible assets is computed on a straight-line basis over the assets’ estimated useful lives, generally for periods ranging from 10 to 15 years.  The Company continually evaluates the reasonableness of the useful lives of these assets.  Indefinite-lived intangible assets are not amortized, but instead are tested at least annually for impairment.  Costs to renew or extend the term of a recognized intangible asset are expensed as incurred.

 

Valuation of Long-Lived Assets, including Intangible Assets other than Goodwill

 

The Company’s long-lived assets primarily consist of property, plant and equipment and definite and indefinite-lived intangible assets. Property, plant and equipment and definite-lived intangible assets are reviewed for impairment whenever events or changes in circumstances (“triggering events”) indicate that the carrying amount of the asset may not be recoverable.  If a triggering event is determined to have occurred, the asset’s carrying value is compared to the future undiscounted cash flows expected to be generated by the asset.  If the carrying value exceeds the undiscounted cash flows of the asset, then impairment exists.  Indefinite-lived intangible assets are tested for impairment at least annually during the fourth quarter of each fiscal year or more frequently if events or triggering events indicate that the asset might be impaired.

 

An impairment loss is measured as the excess of the asset’s carrying value over its fair value, which in most cases is calculated using a discounted cash flow model.  Discounted cash flow models are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.

 

In-Process Research and Development

 

Amounts allocated to in-process research and development in connection with a business combination are recorded at fair value and are considered indefinite-lived intangible assets subject to impairment testing in accordance with the Company’s impairment testing policy for indefinite-lived intangible assets.  As products in development are approved for sale, amounts will be allocated to product rights and will be amortized over their estimated useful lives.  Definite-lived intangible assets are amortized over the expected lives of the related assets. The judgments made in determining the estimated fair value of in-process research and development, as well as asset lives, can materially impact our results of operations.  The Company’s fair value assessments are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.

 

Goodwill

 

Goodwill, which represented the excess of purchase price over the fair value of net assets acquired, was carried at cost.  Goodwill was tested for impairment on an annual basis on the first day of the fourth quarter of each fiscal year or more frequently if events or triggering events indicate that the asset might be impaired.  The Company utilized a quantitative assessment to determine the fair value of our reporting unit (generic pharmaceuticals) based on market data as well as projected cash flows. If the carrying value of our reporting unit exceeded its fair value, the difference would be recorded as a goodwill impairment, not to exceed the carrying amount of goodwill.  The Company’s fair value assessments are highly reliant on various assumptions which are considered Level 3 inputs, including estimates of future cash flows (including long-term growth rates), discount rates and the probability of achieving the estimated cash flows.  The judgments made in determining the estimated fair value of goodwill can materially impact our results of operations.

 

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Segment Information

 

The Company operates in one reportable segment, generic pharmaceuticals.  As such, the Company aggregates its financial information for all products.  The following table identifies the Company’s net sales by medical indication for the three and six months ended December 31, 2018 and 2017:

 

(In thousands)

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

 

Medical Indication

 

2018

 

2017

 

2018

 

2017

 

Antibiotic

 

$

4,187

 

$

3,552

 

$

8,276

 

$

6,900

 

Anti-Psychosis

 

14,036

 

22,799

 

24,924

 

37,791

 

Cardiovascular

 

25,680

 

10,135

 

47,450

 

21,441

 

Central Nervous System

 

6,187

 

6,925

 

13,384

 

15,742

 

Gallstone

 

2,489

 

5,282

 

4,703

 

11,846

 

Gastrointestinal

 

10,009

 

15,055

 

25,048

 

29,608

 

Glaucoma

 

512

 

2,164

 

1,060

 

4,832

 

Migraine

 

12,551

 

15,484

 

22,288

 

30,499

 

Muscle Relaxant

 

3,121

 

3,219

 

6,300

 

7,010

 

Pain Management

 

8,968

 

6,128

 

13,915

 

11,889

 

Respiratory

 

1,163

 

2,230

 

2,178

 

3,876

 

Thyroid Deficiency

 

88,477

 

68,794

 

142,354

 

116,008

 

Urinary

 

1,606

 

2,840

 

3,158

 

5,837

 

Other

 

6,827

 

13,105

 

21,168

 

25,802

 

Contract manufacturing revenue

 

7,905

 

6,593

 

12,566

 

10,185

 

Net sales

 

$

193,718

 

$

184,305

 

$

348,772

 

$

339,266

 

 

Customer, Supplier and Product Concentration

 

The following table presents the percentage of total net sales, for the three and six months ended December 31, 2018 and 2017, for certain of the Company’s products, defined as products containing the same active ingredient or combination of ingredients, which accounted for at least 10% of net sales in any of those periods:

 

 

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Product 1

 

46

%

37

%

41

%

34

%

Product 2

 

7

%

12

%

7

%

10

%

 

The following table presents the percentage of total net sales, for the three and six months ended December 31, 2018 and 2017, for certain of the Company’s customers which accounted for at least 10% of net sales in any of those periods:

 

 

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

Customer A

 

18

%

22

%

23

%

25

%

Customer B

 

14

%

 

8

%

 

Customer C

 

14

%

19

%

16

%

20

%

Customer D

 

13

%

5

%

11

%

5

%

Customer E

 

3

%

13

%

3

%

8

%

 

The Company’s primary finished goods inventory supplier is Jerome Stevens Pharmaceuticals, Inc. (“JSP”), in Bohemia, New York.  Purchases of finished goods inventory from JSP accounted for approximately 34% and 39% of the Company’s inventory purchases during the three months ended December 31, 2018 and 2017, respectively.  Purchases of finished goods inventory from JSP accounted for approximately 33% and 36% of the Company’s inventory purchases during the six months ended December 31, 2018 and 2017, respectively.  See Note 21 “Material Contracts with Suppliers” for more information.

 

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Revenue Recognition

 

On July 1, 2018, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers, which superseded ASC Topic 605, Revenue Recognition.  Under ASC 606, the Company recognizes revenue when (or as) we satisfy our performance obligations by transferring a promised good or service to a customer at an amount that reflects the consideration the Company is expected to be entitled.  Our revenue consists almost entirely of sales of our pharmaceutical products to customers, whereby we ship product to a customer pursuant to a purchase order.  Revenue contracts such as these do not generally give rise to contract assets or contract liabilities because: (i) the underlying contracts generally have only a single performance obligation and (ii) we do not generally receive consideration until the performance obligation is fully satisfied.  The new revenue standard impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time”.  However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position. The Company adopted ASC 606 using the modified retrospective method.  Refer to the “Recent Accounting Pronouncements” section of this footnote for further discussion of the impact of the adoption.

 

When revenue is recognized, a simultaneous adjustment to gross sales is made for estimated chargebacks, rebates, returns, promotional adjustments and other potential adjustments.  These provisions are primarily estimated based on historical experience, future expectations, contractual arrangements with wholesalers and indirect customers and other factors known to management at the time of accrual.  Accruals for provisions are presented in the Consolidated Financial Statements as a reduction to gross sales with the corresponding reserve presented as a reduction of accounts receivable or included as rebates payable, depending on the nature of the reserve.

 

Provisions for chargebacks, rebates, returns and other adjustments require varying degrees of subjectivity.  While rebates generally are based on contractual terms and require minimal estimation, chargebacks and returns require management to make more subjective assumptions.  Each major category is discussed in detail below:

 

Chargebacks

 

The provision for chargebacks is the most significant and complex estimate used in the recognition of revenue. The Company sells its products directly to wholesale distributors, generic distributors, retail pharmacy chains and mail-order pharmacies. The Company also sells its products indirectly to independent pharmacies, managed care organizations, hospitals, nursing homes and group purchasing organizations, collectively referred to as “indirect customers.” The Company enters into agreements with its indirect customers to establish pricing for certain products. The indirect customers then independently select a wholesaler from which to purchase the products. If the price paid by the indirect customers is lower than the price paid by the wholesaler, the Company will provide a credit, called a chargeback, to the wholesaler for the difference between the contractual price with the indirect customers and the wholesaler purchase price. The provision for chargebacks is based on expected sell-through levels by the Company’s wholesale customers to the indirect customers and estimated wholesaler inventory levels. As sales to the large wholesale customers, such as Cardinal Health, AmerisourceBergen and McKesson increase (decrease), the reserve for chargebacks will also generally increase (decrease). However, the size of the increase (decrease) depends on product mix and the amount of sales made to indirect customers with which the Company has specific chargeback agreements. The Company continually monitors the reserve for chargebacks and makes adjustments when management believes that expected chargebacks may differ from the actual chargeback reserve.

 

Rebates

 

Rebates are offered to the Company’s key chain drug store, distributor and wholesaler customers to promote customer loyalty and increase product sales. These rebate programs provide customers with credits upon attainment of pre-established volumes or attainment of net sales milestones for a specified period. Other promotional programs are incentive programs offered to the customers. Additionally, as a result of the Patient Protection and Affordable Care Act (“PPACA”) enacted in the U.S. in March 2010, the Company participates in a new cost-sharing program for certain Medicare Part D beneficiaries designed primarily for the sale of brand drugs and certain generic drugs if their Food and Drug Administration (“FDA”) approval was granted under a New Drug Application (“NDA”) or 505(b) NDA versus an Abbreviated New Drug application (“ANDA’).  Because our drugs used for the treatment of thyroid deficiency and our Morphine Sulfate Oral Solution product were both approved by the FDA as 505(b)(2) NDAs, they are considered “brand” drugs for purposes of the PPACA. Drugs purchased within the Medicare Part D coverage gap (commonly referred to as the “donut hole”) result in additional rebates. The Company estimates the reserve for rebates and other promotional credit programs based on the specific terms in each agreement when revenue is recognized. The reserve for rebates increases (decreases) as sales to certain wholesale and retail customers increase (decrease). However, since these rebate programs are not identical for all customers, the size of the reserve will depend on the mix of sales to customers that are eligible to receive rebates.

 

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Returns

 

Consistent with industry practice, the Company has a product returns policy that allows customers to return product within a specified time period prior to and subsequent to the product’s expiration date in exchange for a credit to be applied to future purchases. The Company’s policy requires that the customer obtain pre-approval from the Company for any qualifying return. The Company estimates its provision for returns based on historical experience, changes to business practices, credit terms and any extenuating circumstances known to management. While historical experience has allowed for reasonable estimations in the past, future returns may or may not follow historical trends. The Company continually monitors the reserve for returns and makes adjustments when management believes that actual product returns may differ from the established reserve. Generally, the reserve for returns increases as net sales increase.

 

Other Adjustments

 

Other adjustments consist primarily of “price adjustments, also known as “shelf-stock adjustments” and “price protections,” which are both credits issued to reflect increases or decreases in the invoice or contract prices of the Company’s products.  In the case of a price decrease, a credit is given for product remaining in customer’s inventories at the time of the price reduction.  Contractual price protection results in a similar credit when the invoice or contract prices of the Company’s products increase, effectively allowing customers to purchase products at previous prices for a specified period of time.  Amounts recorded for estimated shelf-stock adjustments and price protections are based upon specified terms with direct customers, estimated changes in market prices and estimates of inventory held by customers.  The Company regularly monitors these and other factors and evaluates the reserve as additional information becomes available.  Other adjustments also include prompt payment discounts and “failure-to-supply” adjustments.  If the Company is unable to fulfill certain customer orders, the customer can purchase products from our competitors at their prices and charge the Company for any difference in our contractually agreed upon prices.

 

Cost of Sales, including Amortization of Intangibles

 

Cost of sales includes all costs related to bringing products to their final selling destination, which includes direct and indirect costs, such as direct material, labor and overhead expenses.  Additionally, cost of sales includes product royalties, depreciation, amortization and costs to renew or extend recognized intangible assets, freight charges and other shipping and handling expenses.

 

Research and Development

 

Research and development costs are expensed as incurred, including all production costs until a drug candidate is approved by the FDA.  Research and development expenses include costs associated with internal projects as well as costs associated with third-party research and development contracts.

 

Contingencies

 

Loss contingencies, including litigation-related contingencies, are included in the Consolidated Statements of Operations when the Company concludes that a loss is both probable and reasonably estimable.  Legal fees for litigation-related matters are expensed as incurred and included in the Consolidated Statements of Operations under the Selling, general and administrative expenses line item.

 

Restructuring Costs

 

The Company records charges associated with approved restructuring plans to remove duplicative headcount and infrastructure associated with business acquisitions or to simplify business processes.  Restructuring charges can include severance costs to eliminate a specified number of employees, infrastructure charges to vacate facilities and consolidate operations and contract cancellation costs. The Company records restructuring charges based on estimated employee terminations, site closure and consolidation plans. The Company accrues severance and other employee separation costs under these actions when it is probable that a liability exists and the amount is reasonably estimable.

 

Share-based Compensation

 

Share-based compensation costs are recognized over the vesting period, using a straight-line method, based on the fair value of the instrument on the date of grant less an estimate for expected forfeitures.  The Company uses the Black-Scholes valuation model to determine the fair value of stock options, the stock price on the grant date to value restricted stock and the Monte-Carlo simulation model to determine the fair value of performance-based shares.  The Black-Scholes valuation and Monte-Carlo simulation models include various assumptions, including the expected volatility, the expected life of the award, dividend yield and the risk-free interest rate as well as performance assumptions of peer companies.  These assumptions involve inherent uncertainties based on market

 

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conditions which are generally outside the Company’s control.  Changes in these assumptions could have a material impact on share-based compensation costs recognized in the consolidated financial statements.

 

Self-Insurance

 

Effective January 1, 2017, the Company self-insures for certain employee medical and prescription benefits.  The Company also maintains stop loss coverage with third party insurers to limit its total liability exposure.  The liability for self-insured risks is primarily calculated using independent third-party actuarial valuations which take into account actual claims, claims growth and claims incurred but not yet reported.  Actual experience, including claim frequency and severity as well as health-care inflation, could result in different liabilities than the amounts currently recorded.  The liability for self-insured risks under this plan as of December 31, 2018 totaled $2.9 million and was not material to the financial position of the Company as of June 30, 2018.

 

Income Taxes

 

The Company uses the liability method to account for income taxes as prescribed by Accounting Standards Codification (“ASC”) 740, Income Taxes.  Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse.  Deferred tax expense (benefit) is the result of changes in deferred tax assets and liabilities.  Deferred income tax assets and liabilities are adjusted to recognize the effects of changes in tax laws or enacted tax rates in the period during which they are signed into law.  The factors used to assess the likelihood of realization are the Company’s forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets.  Under ASC 740, Income Taxes, a valuation allowance is required when it is more likely than not that all or some portion of the deferred tax assets will not be realized through generating sufficient future taxable income.  Failure to achieve forecasted taxable income in applicable tax jurisdictions could affect the ultimate realization of deferred tax assets and could result in an increase in the Company’s effective tax rate on future earnings.

 

The Company may recognize the tax benefit from an uncertain tax position claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement.  The authoritative accounting standards also provide guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.

 

On December 22, 2017, President Trump signed the Tax Cut and Jobs Act legislation (“2017 Tax Reform”) into law, which included a broad range of tax reform provisions affecting businesses, including corporate tax rates, business deductions and international tax provisions.  Many of these provisions significantly differ from the then-current U.S. tax law, resulting in pervasive financial reporting implications.  As a result of the new law, the SEC issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed in reasonable detail to complete the accounting for certain income tax effects of 2017 Tax Reform.  SAB 118 requires registrants to report the tax effects of 2017 Tax Reform, inclusive of provisional amounts for which the accounting is incomplete but a reasonable estimate can be determined.  SAB 118 also allows for a measurement period of up to one year in cases where a registrant reports a provisional amount or is unable to reasonably estimate the impact of 2017 Tax Reform.   In the second quarter of Fiscal 2019, the Company finalized the provisional amounts without any further adjustments, in accordance with the expiration of the SAB 118 measurement period.

 

Earnings (Loss) Per Common Share

 

Basic earnings (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period.  Diluted earnings (loss) is computed by dividing net income (loss) by the weighted average number of shares outstanding during the period including additional shares that would have been outstanding related to potentially dilutive securities.  These potentially dilutive securities consist of stock options, unvested restricted stock and performance-based shares.  Anti-dilutive securities are excluded from the calculation.  Dilutive shares are also excluded in the calculation in periods of net loss because the effect of including such securities would be anti-dilutive.

 

Comprehensive Income (Loss)

 

Comprehensive income (loss) includes all changes in equity during a period except those that resulted from investments by or distributions to the Company’s stockholders.  Other comprehensive income (loss) refers to gains and losses that are included in comprehensive income (loss), but excluded from income (loss) as these amounts are recorded directly as an adjustment to stockholders’ equity.

 

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Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, which created ASC Topic 606 Revenue from Contracts with Customers.  The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The authoritative guidance is effective for annual reporting periods beginning after December 15, 2017.  Based on a review of the contracts representing a substantial portion of our revenues, which is primarily generated from product sales, the Company determined that the updated guidance does not have a material impact on our disclosures or the timing and recognition of our revenues.  Under the new standard, the Company estimates certain amounts as variable consideration, specifically any “failure-to-supply” adjustments at the point of product sale in future periods.

 

The new revenue standard also impacts the timing of the Company’s revenue recognition by requiring recognition of certain contract manufacturing arrangements to change from “upon shipment or delivery” to “over time”.  However, the recognition of these arrangements over time does not currently have a material impact on the Company’s consolidated results of operations or financial position.

 

The cumulative impact of the adoption of ASC 606 resulted in a $2.3 million adjustment, net of tax, to opening retained earnings on July 1, 2018.

 

In February 2016, the FASB issued ASU 2016-02, Leases.  ASU 2016-02 requires an entity to recognize right-of-use assets and liabilities on its balance sheet for all leases with terms longer than 12 months.  Lessees and lessors are required to disclose quantitative and qualitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.  ASU 2016-02 is effective for annual reporting periods beginning after December 15, 2018, including interim periods within that reporting period and requires a modified retrospective application, with early adoption permitted.  In December 2018, the FASB issued ASU 2018-20, Leases — Narrow Scope Improvements for lessors, which allows entities to choose an additional transition method of adoption, under which an entity initially applies the new standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earinings in the period of adoption.  The Company is currently in the process of assessing the impact this guidance will have on the consolidated financial statements.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows — Classification of Certain Cash Receipts and Cash Payments.  ASU 2016-15 addresses how certain cash receipts and cash payments are presented and classified in the statement of cash flows.  The standard was adopted on July 1, 2018 and did not have an impact on the Company’s consolidated financial statements.

 

Note 4.  Restructuring Charges

 

Cody Restructuring Program

 

On June 29, 2018, the Company announced a restructuring plan with respect to Cody Labs (the “Cody Restructuring Plan”).  The plan focuses on a more select set of opportunities which will result in streamlined operations, improved efficiencies and a reduced cost structure.  The Company currently estimates that it will incur approximately $4.5 million of total costs to implement the Cody Restructuring Plan, comprised primarily of approximately $3.0 million of severance and employee-related costs.

 

The expenses associated with the Cody Restructuring Plan included in restructuring expenses (credits) during the three and six months ended December 31, 2018 were as follows:

 

 

 

Three Months Ended

 

Six Months Ended

 

(In thousands)

 

December 31, 2018

 

December 31, 2018

 

Employee separation costs (credits)

 

$

(640

)

$

(496

)

Facility closure costs

 

 

 

Total

 

$

(640

)

$

(496

)

 

In the second quarter of Fiscal 2019, the Company adjusted separation costs related to changes in stock price for unvested equity awards, which will be paid upon termination to certain employees.

 

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A reconciliation of the changes in restructuring liabilities associated with the Cody Restructuring Plan from June 30, 2018 through December 31, 2018 is set forth in the following table:

 

(In thousands)

 

Employee
Separation Costs

 

Facility Closure
Costs

 

Total

 

Balance at June 30, 2018

 

$

3,092

 

$

 

$

3,092

 

Restructuring Charges

 

(496

)

 

(496

)

Payments

 

(1,074

)

 

(1,074

)

Balance at December 31, 2018

 

$

1,522

 

 

$

1,522

 

 

2016 Restructuring Program

 

On February 1, 2016, in connection with the acquisition of KUPI, the Company announced a plan related to the future integration of KUPI and the Company’s operations (the “2016 Restructuring Program”). The plan focuses on the closure of KUPI’s corporate functions and the consolidation of manufacturing, sales, research and development and distribution functions. The Company estimates that it will incur an aggregate of up to approximately $20.0 million in restructuring charges for actions that have been announced or communicated since the 2016 Restructuring Program began.  Of this amount, approximately $11.0 million relates to employee separation costs, approximately $1.0 million relates to contract termination costs and approximately $8.0 million relates to facility closure costs and other actions. The 2016 Restructuring Program is expected to be completed by the end of Fiscal 2019.

 

The expenses associated with the restructuring program included in restructuring expenses during the three and six months ended December 31, 2018 and 2017 were as follows:

 

 

 

Three Months Ended
December 31,

 

Six Months Ended
December 31,

 

(In thousands)

 

2018

 

2017

 

2018

 

2017

 

Employee separation costs (credits)

 

$

293

 

$

210

 

$

707

 

$

(380

)

Facility closure costs

 

560

 

825

 

1,024

 

1,942

 

Total

 

$

853

 

$

1,035

 

$

1,731

 

$

1,562

 

 

A reconciliation of the changes in restructuring liabilities associated with the 2016 Restructuring Program from June 30, 2018 through December 31, 2018 is set forth in the following table:

 

(In thousands)

 

Employee
Separation Costs

 

Facility Closure
Costs

 

Total

 

Balance at June 30, 2018

 

$

3,614

 

$

 

$

3,614

 

Restructuring Charges

 

707

 

1,024

 

1,731

 

Payments

 

(150

)

(1,024

)

(1,174

)

Balance at December 31, 2018

 

$

4,171

 

$

 

$

4,171

 

 

Note 5.  Accounts Receivable

 

Accounts receivable consisted of the following components at December 31, 2018 and June 30, 2018:

 

(In thousands)

 

December 31,
2018

 

June 30,
2018

 

Gross accounts receivable

 

$

515,266

 

$

503,175

 

Less Chargebacks reserve

 

(128,102

)

(153,034

)

Less Rebates reserve

 

(34,673

)

(33,102

)

Less Returns reserve

 

(49,508

)

(43,059

)

Less Other deductions

 

(26,263

)

(20,021

)

Less Allowance for doubtful accounts

 

(1,356

)

(1,308

)

Accounts receivable, net

 

$

275,364

 

$

252,651

 

 

For the three months ended December 31, 2018, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $334.6 million, $78.8 million, $11.3 million, and $20.7 million, respectively.  For the three months ended December 31, 2017, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns and other deductions of $220.2 million, $77.6 million, $4.1 million, and $16.3 million, respectively.

 

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For the six months ended December 31, 2018, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of $612.6 million, $143.6 million, $18.7 million, and $34.6 million, respectively.  For the six months ended December 31, 2017, the Company recorded a provision for chargebacks, rebates (including rebates presented as rebates payable), returns, and other deductions of $474.9 million, $156.1 million, $14.5 million, and $28.6 million, respectively.

 

The following table identifies the activity and ending balances of each major category of revenue-related reserve for the six months ended December 31, 2018 and 2017:

 

Reserve Category
(In thousands)

 

Chargebacks

 

Rebates

 

Returns

 

Other

 

Total

 

Balance at June 30, 2018

 

$

153,034

 

$

82,502

 

$

43,059

 

$

20,021

 

$

298,616

 

Adjustment related to adoption of ASC 606

 

 

 

 

3,536

 

3,536

 

Current period provision

 

612,560

 

143,578

 

18,662

 

34,574

 

809,374

 

Credits issued during the period

 

(637,492

)

(147,023

)

(12,213

)

(31,868

)

(828,596

)

Balance at December 31, 2018

 

$

128,102

 

$

79,057

 

$

49,508

 

$

26,263

 

$

282,930

 

 

Reserve Category
(In thousands)

 

Chargebacks

 

Rebates

 

Returns

 

Other

 

Total

 

Balance at June 30, 2017

 

$

79,537

 

$

87,616

 

$

42,135

 

$

11,096

 

$

220,384

 

Current period provision

 

474,882

 

156,073

 

14,541

 

28,623

 

674,119

 

Credits issued during the period

 

(499,959

)

(157,071

)

(11,881

)

(21,713

)

(690,624

)

Balance at December 31, 2017

 

$

54,460

 

$

86,618

 

$

44,795

 

$

18,006

 

$

203,879

 

 

For the three months ending December 31, 2018 and 2017, as a percentage of gross sales the provision for chargebacks was 53.0% and 44.4%, the provision for rebates was 12.5% and 15.7%, the provision for returns was 1.8% and 0.8% and the provision for other adjustments was 3.3% and 3.3%, respectively.

 

For the six months ending December 31, 2018 and 2017, as a percentage of gross sales the provision for chargebacks was 53.5% and 47.3%, the provision for rebates was 12.5% and 15.6%, the provision for returns was 1.6% and 1.4%, and the provision for other adjustments was 3.0% and 2.9%, respectively.

 

On July 1, 2018, the Company adopted ASC 606 which resulted in a $3.2 million pre-tax adjustment to opening retained earnings and accounts receivable, of which $3.5 million related to “failure-to-supply” reserves offset by $0.3 million related to the timing of recognition of certain contract manufacturing arrangements.

 

The decrease in the chargebacks reserve from June 30, 2018 to December 31, 2018 was primarily the result of increased customer orders in June 2018 in advance of a mid-week holiday as well as a related maintenance shutdown of the Company’s Seymour, Indiana manufacturing facility in the first week of July 2018.  The Amneal Distribution and Transition Support Agreement (the “Amneal Agreement”), which shifted the Company’s sales of Levothyroxine Sodium Tablets directly to Amneal, also contributed to the decrease in the chargebacks reserve.  The activity in the “Other” category for the six months ended December 31, 2018 and 2017 includes, shelf-stock, shipping and other sales adjustments including prompt payment discounts and “failure-to-supply” adjustments.  Historically, we have not recorded any material amounts in the current period related to reversals or additions of prior period reserves.  If the Company were to record a material reversal or addition of any prior period reserve amount, it would be separately disclosed.

 

Note 6.  Inventories

 

Inventories at December 31, 2018 and June 30, 2018 consisted of the following:

 

(In thousands)

 

December 31,
2018

 

June 30,
2018

 

Raw materials

 

$

57,780

 

$

64,647

 

Work-in-process

 

30,726

 

19,983

 

Finished goods

 

47,622

 

57,005

 

Total

 

$

136,128

 

$

141,635

 

 

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Inventory balances were written-down by $20.7 million and $11.9 million at December 31, 2018 and June 30, 2018, respectively for excess and obsolete inventory amounts.  During the three months ended December 31, 2018 and 2017, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $8.9 million and $2.2 million, respectively.  During the six months ended December 31, 2018 and 2017, the Company recorded write-downs to net realizable value for excess and obsolete inventory of $12.8 million and $4.4 million, respectively.

 

In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business.  As such, all assets, including inventory totaling $3.4 million, and liabilities associated with the Cody API business are recorded in the assets and liabilities held for sale captions in the Consolidated Balance Sheet as of December 31, 2018.  See Note 22 “Assets Held for Sale” for more information.

 

Note 7.  Property, Plant and Equipment

 

Property, plant and equipment, net at December 31, 2018 and June 30, 2018 consisted of the following:

 

(In thousands)

 

Useful Lives

 

December 31,
2018

 

June 30,
2018

 

Land

 

 

$

2,283

 

$

2,900

 

Building and improvements

 

10 - 39 years

 

85,958

 

105,041

 

Machinery and equipment

 

5 - 10 years

 

156,903

 

173,988

 

Furniture and fixtures

 

5 - 7 years

 

3,224

 

4,099

 

Less: accumulated depreciation

 

 

 

(79,991

)

(89,996

)

 

 

 

 

168,377

 

196,032

 

Construction in progress

 

 

 

27,230

 

37,215

 

Property, plant and equipment, net

 

 

 

$

195,607

 

$

233,247

 

 

Depreciation expense for the three months ended December 31, 2018 and 2017 was $5.7 million and $5.4 million, respectively.  Depreciation expense for the six months ended December 31, 2018 and 2017 was $12.2 million and $11.1 million, respectively.

 

In the first quarter of Fiscal 2019, the Company approved a plan to sell the Cody API business.  As such, all assets, including property, plant and equipment totaling $36.6 million, and liabilities associated with the Cody API business are recorded in the assets and liabilities held for sale captions in the Consolidated Balance Sheet as of December 31, 2018.  In addition, as part of the held for sale classification, the Company is required to record the assets of the Cody API business at fair value less costs to sell.  The Company performed a fair value analysis which resulted in a $29.9 million impairment of the Cody API property, plant and equipment assets.  See Note 22 “Assets Held for Sale” for more information.  During the three months ended December 31, 2018, the Company had no impairment charges related to property, plant and equipment.

 

Property, plant and equipment, net included amounts held in foreign countries in the amount of $1.7 million and $1.1 million at December 31, 2018 and June 30, 2018, respectively.

 

Note 8.  Fair Value Measurements

 

The Company’s financial instruments recorded in the Consolidated Balance Sheets include cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt obligations.  Included in cash and cash equivalents are certificates of deposit with maturities less than or equal to three months at the date of purchase and money market funds.  The carrying value of certain financial instruments, primarily cash and cash equivalents, accounts receivable, accounts payable and accrued expenses, approximate their estimated fair values based upon the short-term nature of their maturity dates.

 

The Company follows the authoritative guidance of ASC Topic 820 “Fair Value Measurements and Disclosures.”  Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  The authoritative guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The Company’s financial assets and liabilities measured at fair value are entirely within Level 1 of the hierarchy as defined below:

 

Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

 

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Level 2 — Directly or indirectly observable inputs, other than quoted prices, such as quoted prices for similar assets or liabilities; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose inputs are observable or whose significant value drivers are observable.

 

Level 3 — Unobservable inputs that are supported by little or no market activity and that are material to the fair value of the asset or liability.  Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation are examples of Level 3 assets and liabilities.

 

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.

 

Financial Instruments Disclosed, But Not Reported, at Fair Value

 

The fair value of our long-term debt was approximately $727 million and $893 million as of December 31, 2018 and June 30, 2018, respectively.  We estimate the fair value of our debt utilizing market quotations for debt that have quoted prices in active markets. Since our debt does not trade on a daily basis in an active market, the fair value estimates are based on market observable inputs based on borrowing rates currently available for debt with similar terms and average maturities (Level 2).

 

Note 9.  Investment Securities

 

The Company uses the specific identification method to determine the cost of securities sold, which consisted entirely of equity securities classified as trading.

 

In May 2018, the Company liquidated the remainder of the investment securities portfolio.  As of December 31, 2018 and June 30, 2018, the Company does not own investment securities.

 

The Company had a net gain on investment securities of $2.0 million during the three months ended December 31, 2017, which included an unrealized gain related to securities still held at December 31, 2017 of $1.2 million.

 

The Company had a net gain on investment securities of $2.8 million during the six months ended December 31, 2017, which included an unrealized gain related to securities still held at December 31, 2017 of $1.1 million.

 

Note 10. Goodwill and Intangible Assets

 

The changes in the carrying amount of goodwill for the six months ended December 31, 2018 are as follows:

 

(In thousands)

 

Generic
Pharmaceuticals

 

Balance at June 30, 2018

 

$

339,566

 

Goodwill acquired

 

 

Impairment

 

(339,566

)

Balance at December 31, 2018

 

$

 

 

On August 17, 2018, JSP notified the Company that it will not extend or renew the JSP Distribution Agreement when the current term expires on March 23, 2019.  The Company determined that JSP’s decision represented a triggering event under U.S. GAAP to perform an analysis to determine the potential for impairment of goodwill. On October 4, 2018, the Company completed the analysis based on market data and concluded a full impairment of goodwill was required.

 

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Intangible assets, net as of December 31, 2018 and June 30, 2018, consisted of the following:

 

 

 

Weighted

 

Gross Carrying Amount

 

Accumulated Amortization

 

Intangible Assets, Net

 

(In thousands)

 

Avg. Life
(Yrs.)

 

December 31,
2018

 

June 30,
2018

 

December 31,
2018

 

June 30,
2018

 

December 31,
2018

 

June 30,
2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Definite-lived:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cody Labs import license

 

15

 

$

 

$

581

 

$

 

$

(386

)

$

 

$

195

 

KUPI product rights

 

15

 

416,154

 

416,154

 

(83,712

)

(69,840

)

332,442

 

346,314

 

KUPI trade name

 

2

 

2,920

 

2,920

 

(2,920

)

(2,920

)

 

 

KUPI other intangible assets

 

15

 

19,000

 

19,000

 

(3,928

)

(3,295

)

15,072

 

15,705

 

Silarx product rights

 

15

 

10,000

 

10,000

 

(2,389

)

(2,056

)

7,611

 

7,944

 

Other product rights

 

13

 

21,692

 

19,693

 

(3,396

)

(1,875

)

18,296

 

17,818

 

Total definite-lived

 

 

 

$

469,766

 

$

468,348

 

$

(96,345

)

$

(80,372

)

$

373,421

 

$

387,976

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Indefinite-lived:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

KUPI in-process research and development

 

 

$

18,000

 

$

18,000

 

$

 

$

 

$

18,000

 

$

18,000

 

Silarx in-process research and development

 

 

18,000

 

18,000

 

 

 

18,000

 

18,000

 

Other product rights

 

 

449

 

449

 

 

 

449

 

449

 

Total indefinite-lived

 

 

 

36,449

 

36,449

 

 

 

36,449

 

36,449

 

Total intangible assets, net

 

 

 

$

506,215

 

$

504,797

 

$

(96,345

)

$

(80,372

)

$

409,870

 

$

424,425

 

 

For the three months ended December 31, 2018 and 2017, the Company recorded amortization expense of $8.2 million.  For the six months ended December 31, 2018 and 2017, the Company recorded amortization expense of $16.4 million and $16.3 million, respectively.

 

Future annual amortization expense consisted of the following as of December 31, 2018:

 

(In thousands)
Fiscal Year Ending June 30,

 

Annual Amortization Expense

 

2019

 

$

15,224

 

2020

 

30,443

 

2021

 

30,443

 

2022

 

30,443

 

2023

 

30,443

 

Thereafter

 

236,425

 

 

 

$

373,421

 

 

Note 11.  Long-Term Debt

 

Long-term debt, net consisted of the following:

 

 

 

December 31,

 

June 30,

 

(In thousands)

 

2018

 

2018

 

Term Loan A due 2020; 7.52% as of December 31, 2018

 

$

213,526

 

$

227,276

 

Unamortized discount and other debt issuance costs

 

(8,843

)

(10,178

)

Term Loan A, net

 

204,683

 

217,098

 

Term Loan B due 2022; 7.90% as of December 31, 2018

 

650,338

 

670,011

 

Unamortized discount and other debt issuance costs

 

(41,569

)

(47,839

)

Term Loan B, net

 

608,769

 

622,172

 

Revolving Credit Facility due 2020

 

 

 

Total debt, net

 

813,452

 

839,270

 

Less short-term borrowings and current portion of long-term debt

 

(66,845

)

(66,845

)

Total long-term debt, net

 

$

746,607

 

$

772,425

 

 

On December 10, 2018, the Company entered into an amendment to the Senior Secured Credit Facility and the Credit and Guaranty Agreement.  Pursuant to the amendment, the Secured Net Leverage Ratio applicable to the financial leverage ratio covenant was increased from 3:25:1.00 to 4.25:1.00 as of December 31, 2019 and prior to September 30, 2020, and then to 4:00:1:00 as of September 30, 2020.  In exchange, the Company agreed to include a minimum liquidity covenant of $75 million, a 25-basis point

 

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increase to the interest rate margin paid on the Term A Loans and pay a consent fee equal to 50 basis points, paid only to consenting lenders.

 

Long-term debt amounts due, for the twelve-month periods ending December 31 are as follows:

 

 

 

Amounts Payable

 

(In thousands)

 

to Institutions

 

2019

 

$

66,845

 

2020

 

225,371

 

2021

 

39,345

 

2022

 

532,303

 

Total

 

$

863,864

 

 

Note 12.  Legal, Regulatory Matters and Contingencies

 

Connecticut Attorney General Inquiry

 

In July 2014, the Company received interrogatories and subpoena from the State of Connecticut Office of the Attorney General concerning its investigation into the pricing of digoxin.  According to the subpoena, the Connecticut Attorney General is investigating whether anyone engaged in any activities that resulted in (a) fixing, maintaining or controlling prices of digoxin or (b) allocating and dividing customers or territories relating to the sale of digoxin in violation of Connecticut antitrust law.  In June 2016, the Connecticut Attorney General issued interrogatories and a subpoena to an employee of the Company in order to gain access to documents and responses previously supplied to the Department of Justice.  In December 2016, the Connecticut Attorney General, joined by numerous other State Attorneys General, filed a civil complaint alleging that six pharmaceutical companies engaged in anti-competitive behavior related to doxycycline hyclate and gliburide.  The Company was not named in the action and does not compete on the products that formed the basis of the complaint.  The complaint was later transferred for pretrial purposes to the United States District Court for the Eastern District of Pennsylvania as part of a multidistrict litigation captioned In re: Generic Pharmaceuticals Pricing Antitrust Litigation.  On October 31, 2017, the state Attorneys General filed a motion in the District Court for leave to amend their complaint to add numerous additional defendants, including the Company, and claims relating to 13 additional drugs.  The claim relating to Lannett involves alleged price-fixing for one drug, doxycycline monohydrate, but does not involve the pricing for digoxin.  The state Attorneys General also allege that all defendants were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally.  The Court granted that motion on June 5, 2018.  The state Attorneys General filed their amended complaint on June 15, 2018.  None of the defendants, including the Company, has responded yet to the amended complaint.

 

The Company maintains that it acted in compliance with all applicable laws and regulations and continues to cooperate with the Connecticut Attorney General investigation.

 

Federal Investigation into the Generic Pharmaceutical Industry

 

The Company and certain affiliated individuals and customers have been served with grand jury subpoenas relating to a federal investigation of the generic pharmaceutical industry into possible violations of the Sherman Act.  The subpoenas request corporate documents of the Company relating to corporate, financial and employee information, communications or correspondence with competitors regarding the sale of generic prescription medications and the marketing, sale, or pricing of certain products, generally for the period of 2005 through the dates of the subpoenas.

 

The Company received a Civil Investigative Demand (“CID”) from the Department of Justice on May 14, 2018.  The CID requests information regarding allegations that the generic pharmaceutical industry engaged in market allocation, price fixing, payment of illegal remuneration and submission of false claims.  The CID requests information from 2009-present. The Company is in the process of responding to the CID.

 

Based on reviews performed to date by outside counsel, the Company currently believes that it has acted in compliance with all applicable laws and regulations and continues to cooperate with the federal investigation.

 

Texas Medicaid Investigation

 

In August 2015, KUPI received a letter from the Texas Office of the Attorney General alleging that it had inaccurately reported certain price information in violation of the Texas Medicaid Fraud Prevention Act. UCB, KUPI’s previous parent company is handling the defense and is evaluating the allegations and cooperating with the Texas Attorney General’s Office.  Per the terms of the Stock Purchase Agreement between the Company and UCB (“Stock Purchase Agreement”) dated September 2, 2015, the Company is fully

 

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indemnified for any pre-acquisition amounts.  In December 2018, KUPI and the State of Texas settled the allegations for the sum of $8.0 million, which is fully indemnified by UCB.  UCB forwarded the $8.0 million to KUPI in December 2018 and, following its receipt of the fully executed settlement agreement, KUPI forwarded the settlement funds to the State of Texas in January 2019.

 

Government Pricing

 

During the quarter ended December 31, 2016, the Company completed a contract compliance review, for the period January 1, 2012 through June 30, 2016, for one of KUPI’s government-entity customers.  As a result of the review, the Company identified certain commercial customer prices and other terms that were not properly disclosed to the government-entity resulting in potential overcharges.  As of December 31, 2018 and June 30, 2018, the Company’s best estimate of the liability for potential overcharges was approximately $9.3 million.  For the period January 1, 2012 through November 24, 2015 (“the pre-acquisition period”), the Company is fully indemnified per the Stock Purchase Agreement.  Accordingly, the Company has recorded an indemnification asset and related liability of $8.3 million related to the pre-acquisition period.  The Company does not believe that the ultimate resolution of this matter will have a significant impact on our financial position, results of operations or cash flows.

 

EPA Violation Notice

 

On July 13, 2017, the United States Department of Environmental Protection Agency (“EPA”) sent a Finding of Violation to KUPI alleging several violations of national emissions standards for hazardous air pollutants at KUPI’s Seymour, Indiana facility.  The EPA and KUPI have entered into an agreed Administrative Consent Order and Consent Assessment and Final Order to resolve the alleged violations, whereby KUPI made a payment of $60,000 to the EPA and escrowed the sum of $225,000 to be used to fund an environmental project. The Orders were fully executed on December 31, 2018.

 

Private Antitrust and Consumer Protection Litigation

 

The Company and certain competitors have been named as defendants in a number of lawsuits filed in 2016 and 2017 alleging that the Company and certain generic pharmaceutical manufacturers have conspired to fix prices of generic digoxin, levothyroxine, ursodiol and baclofen.  These cases are part of a larger group of more than 100 lawsuits generally alleging that over 30 generic pharmaceutical manufacturers and distributors conspired to fix prices for at least 18 different generic drugs in violation of the federal Sherman Act, various state antitrust laws, and various state consumer protection statutes.  The United States also has been granted leave to intervene in the cases.  On April 6, 2017, the Judicial Panel on Multidistrict Litigation (the “JPML”) ordered that all of the cases alleging price-fixing for generic drugs be consolidated for pretrial proceedings in the United States District Court for the Eastern District of Pennsylvania under the caption In re: Generic Pharmaceuticals Pricing Antitrust Litigation.  The various plaintiffs are grouped into three categories — Direct Purchaser Plaintiffs, End Payer Plaintiffs, and Indirect Reseller Purchasers — and filed Consolidated Amended Complaints (“CACs”) against the Company and the other defendants on August 15, 2017.

 

The CACs naming the Company as a defendant involve generic digoxin, levothyroxine, ursodiol and baclofen.  Pursuant to a court-ordered schedule grouping the 18 different drug cases into three separate tranches, the Company and other generic pharmaceutical manufacturer defendants on October 6, 2017 filed joint and individual motions to dismiss the CACs involving the six drugs in the first tranche, including digoxin.  On October 16, 2018, the Court (with one exception) denied defendants’ motions to dismiss plaintiffs’ Sherman Act claims with respect to the drugs in the first tranche.  Defendants’ motions to dismiss plaintiffs’ state law claims with respect to those drugs remain pending.

 

On January 22, 2018, three opt-out direct purchasers filed a complaint alleging an overarching conspiracy and individual conspiracies on behalf of the Company and numerous other defendants to fix the prices of and allocate markets for at least 30 different drugs, including digoxin, doxycycline, levothyroxine, ursodiol and baclofen. On August 3, 2018, another opt-out direct purchaser filed a complaint alleging an overarching conspiracy and individual conspiracies on behalf of the Company and numerous other defendants to fix the prices of and allocate markets for 16 different drugs, including digoxin, doxycycline, levothyroxine, ursodiol and baclofen.   On January 16, 2019, another opt-out direct purchaser filed a complaint alleging an overarching conspiracy and individual conspiracies on behalf of the Company and numerous other defendants to fix the prices of and allocate markets for the 30 different drugs, including digoxin, doxycycline, levothyroxine, ursodiol, baclofen and acetazolamide. None of the defendants, including the Company, has responded yet to the opt-out complaints.

 

In addition to the lawsuits brought by private plaintiffs, the Attorneys General of 48 states, the District of Columbia and Puerto Rico have filed parens patriae lawsuits alleging price-fixing conspiracies by various generic pharmaceutical manufacturers.  The JPML has consolidated the suits by the state Attorneys General in the Eastern District of Pennsylvania as part of the multidistrict litigation. The original lawsuits did not name the Company, but the state Attorneys General filed an amended complaint on June 5, 2018 to add numerous additional defendants, including the Company, and claims relating to 13 additional drugs.  The claim relating to Lannett involves alleged price-fixing for one drug, doxycycline monohydrate, although the state Attorneys General allege that all defendants

 

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were part of an overarching, industry-wide conspiracy to allocate markets and fix prices generally.  None of the defendants, including the Company, has responded yet to the amended complaint.

 

Following the lead of the state Attorneys General, the Direct Purchaser Plaintiffs, End Payer Plaintiffs and Indirect Reseller Plaintiffs have filed their own complaints also alleging an overarching conspiracy, making similar allegations to those contained in the state Attorneys General complaint, relating to 14 generic drugs in the End Payer complaint and 15 generic drugs in the Indirect Reseller complaint.  The End Payer Plaintiffs filed their complaint on June 7, 2018, the Indirect Reseller Plaintiffs filed their complaint on June 18, 2018, and the Direct Purchaser Plaintiffs filed their complaint on June 22, 2018.  Although the complaints allege an overarching conspiracy with respect to all of the drugs identified, the specific allegations related to drugs Lannett makes involve acetazolamide and doxycycline monohydrate. None of the defendants, including the Company, has responded yet to these complaints.

 

On September 25, 2018, two other alleged direct purchasers filed a purported class action complaint alleging an overreaching, industry-wide horizontal and vertical conspiracy involving the company, other generic pharmaceutical manufacturers, and various pharmaceutical distributors to allocate markets and fix prices generally for a variety of generic drugs. The case has been added to the multidistrict litigation. On December 21, 2018, the plaintiffs filed an amended complaint. None of the defendants, including the Company, has responded yet to the amended complaint.

 

The Company believes that it acted in compliance with all applicable laws and regulations.  Accordingly, the Company disputes the allegations set forth in these class actions.

 

Shareholder Litigation

 

In November 2016, a putative class action lawsuit was filed against the Company and two of its officers claiming that the Company damaged the purported class by including in its securities filings false and misleading statements regarding the Company’s drug pricing methodologies and internal controls.  An amended complaint was filed in May 2017, and the Company filed a motion to dismiss the amended complaint in September 2017.  In December 2017, counsel for the putative class filed a second amended complaint, and the Court denied as moot the Company’s motion to dismiss the first amended complaint.  The Company filed a motion to dismiss the second amended complaint in February 2018.  In July 2018, the court granted the Company’s motion to dismiss the second amended complaint. In September 2018, counsel for the putative class filed a third amended complaint.  The Company filed a motion to dismiss the third amended complaint in November 2018.  The Company cannot reasonably predict the outcome of the suit at this time.

 

In July 2018, a shareholder derivative complaint was filed against the Company and certain of its current and former directors and executives in the United States District Court for the Eastern District of Pennsylvania.  The derivative complaint alleges that the Company engaged in an illegal conspiracy to fix generic drug prices and that the Company’s directors and executives violated their fiduciary duties by allowing the Company to violate the applicable laws and regulations and failing to take any action to curtail management’s deliberate price-fixing scheme.  The derivative complaint includes causes of action for violation of Section 10(b) of the Exchange Act, violation of Section 14(a) of the Exchange Act, violation of Section 29(a) of the Exchange Act, and for breach of fiduciary duty. In October 2018, the Court issued an order stating the derivative suit for all purposes for a period of 180 days or until the Court issues an order on the motion to dismiss the third amended complaint filed in the matter of Utesch v. Lannett Co., Inc., et al., No. 2:16cv-05932, whichever is later. The Company cannot reasonably predict the outcome of the suit at this time.

 

In October 2018, a putative class action lawsuit was filed against the Company and two of its officers in the federal court for the Eastern District of Pennsylvania, alleging that the Company, its Chief Executive Officer and its Chief Financial Officer damaged the purported class by making false and misleading statements in connection with the possible renewal of the JSP Distribution Agreement.   The Company and the corporate executives named in the complaint deny that they made any false or misleading statements.  In December 2018, counsel for the putative class filed an amended complaint. The Company moved to dismiss the amended complaint in January 2019.  The Company cannot reasonably predict the outcome of this suit at this time.

 

In December 2018, the Chairman of the Company’s Board of Directors received a letter sent on behalf of two purported shareholders demanding that the Company’s Board of Directors investigate and commence legal proceedings against certain former and/or current directors, officers, and agents of the Company relating to alleged breaches of fiduciary duties, corporate waste, and unjust enrichment. The Company and the Company’s Board of Directors responded to the demand letter by requesting that the purported shareholders provide proof of their status and shareholders of the Company. The Company and the Company’s Board of Directors recently received a reply to the letter sent in response to the demand letter and are reviewing the information provided. At this time the Company cannot reasonably predict what outcome, if any, will follow from the Company and the Company’s Board of Director’s receipt of the demand letter.

 

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Genus Life Sciences

 

In December 2018, Genus Lifesciences, Inc. (“Genus”) sued the Company, Cody Labs, and others in California federal court, alleging violations of the Lanham Act, Sherman Act, and California false advertising law.  Genus received FDA approval for a cocaine hydrochloride product in December 2018, and its claims are premised in part on allegations that the Company falsely advertises its unapproved cocaine hydrochloride product, C-Topical.  The Company denies that it is falsely advertising its C-Topical product and continues to market its unapproved product relying on the Guidance for FDA Staff and Industry, Marketed Unapproved Drugs — Compliance Policy Guide, pending approval of its 505(b)(2) application.  The Company cannot reasonably predict the outcome of this suit at this time.

 

Patent Infringement (Paragraph IV Certification)

 

There is substantial litigation in the pharmaceutical industry with respect to the manufacture, use and sale of new products which are the subject of conflicting patent and intellectual property claims.  Certain of these claims relate to paragraph IV certifications, which allege that an innovator patent is invalid or would not be infringed upon by the manufacture, use, or sale of the new drug.

 

Zomig®

 

The Company filed with the FDA an ANDA No. 206350, along with a paragraph IV certification, alleging that the two patents associated with the Zomig® nasal spray product (U.S. Patent No. 6,750,237 and U.S. Patent No. 67,220,767) are invalid.

 

In July 2014, AstraZeneca AB, AstraZeneca UK Limited and Impax Laboratories, Inc. filed two patent infringement lawsuits in the United States District Court for the District of Delaware, alleging that the Company’s filing of ANDA No. 206350 constitutes an act of patent infringement and seeking a declaration that the two patents at issue are valid and infringed.

 

In September 2014, the Company filed a motion to dismiss one patent infringement lawsuit for lack of standing and responded to the second lawsuit by denying that any valid patent claim would be infringed.  In the second lawsuit, the Company also counterclaimed for a declaratory judgment that the patent claims are invalid and not infringed.  The Court has consolidated the two actions and denied the motion to dismiss the first action without prejudice.

 

In July 2015, the Company filed with the United States Patent and Trademark Office (“USPTO”) a Petition for Inter Partes Review of each of the patents in suit seeking to reject as invalid all claims of the patents in suit.  The USPTO has issued a decision denying initiation of the Inter Partes Review.

 

A trial was conducted in September 2016.  The Court issued its decision on March 29, 2017, finding that Lannett did not prove that the patents at issue are invalid.  The Company has appealed the decision. All briefing to the appellate court has been submitted, and oral argument before the appellate court was conducted on April 5, 2018.  The appellate court issued an opinion on June 28, 2018, upholding the decision of the District Court.  The Company requested a rehearing by the appellate court on August 13, 2018.  The appellate court denied the request on September 14, 2018, and issued its mandate terminating the appeal on September 21, 2018.

 

Other Litigation Matters

 

The Company is also subject to various legal proceedings arising out of the normal course of its business including, but not limited to, product liability, intellectual property, patent infringement claims and antitrust matters.  It is not possible to predict the outcome of these various proceedings.  An adverse determination in any of these proceedings in the future could have a significant impact on the financial position, results of operations and cash flows of the Company.

 

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Note 13.  Commitments

 

Leases

 

The Company leases certain manufacturing and office equipment, in the ordinary course of business.  These leases are typically renewed annually.  Rental and lease expense was not material for all periods presented.

 

Future minimum lease payments under noncancelable operating leases (with initial or remaining lease terms in excess of one year) for the remainder of Fiscal 2019 and the twelve-month periods ending June 30 thereafter are as follows:

 

(In thousands)

 

Amounts Due

 

Remainder of 2019

 

$

922

 

2020

 

1,855

 

2021

 

1,406

 

2022

 

1,080

 

2023

 

1,080

 

Thereafter

 

4,158

 

Total

 

$

10,501

 

 

Other Commitment

 

During the third quarter of Fiscal 2017, the Company signed an agreement with a company operating in the pharmaceutical business, under which the Company agreed to provide up to $15.0 million in revolving loans, which expires in seven years and bears interest at 2.0%, for the purpose of expansion and other business needs.  The decision to provide any portion of the revolving loan is at the Company’s sole discretion.  Prior to the first quarter of Fiscal 2019, the Company had the option to convert the first $7.5 million into a 50% ownership interest in the entity.  The board of the entity is comprised of five members, one of which is an employee of the Company.

 

In the first quarter of Fiscal 2019, the Company sold 50% of the outstanding loan to a third party for $5.6 million and, in addition to assigning 50% of all right, title and interest in the loan and loan documents, the Company relinquished its right to convert a portion of the outstanding loan balance to an equity interest in the entity. As of December 31, 2018, $5.8 million was outstanding under the revolving loan and is included in other assets.  In addition to the loan repayment, the agreement was amended to eliminate the Company’s ability to convert the outstanding loan balance into an ownership interest.  Based on the guidance set forth in ASC 810-10 Consolidation, the Company has concluded that it has a variable interest in the entity.  However, the Company is not the primary beneficiary to the entity and as such, is not required to consolidate the entity’s results of operations.

 

Note 14.  Accumulated Other Comprehensive Loss

 

The Company’s Accumulated Other Comprehensive Loss was comprised of the following components as of December 31, 2018 and 2017:

 

(In thousands)

 

December 31,
2018

 

December 31,
2017

 

Foreign Currency Translation

 

 

 

 

 

Beginning Balance, June 30

 

$

(515

)

$

(222

)

Net gain (loss) on foreign currency translation (net of tax of $0 and $0)

 

13

 

(125

)

Reclassifications to net income (net of tax of $0 and $0)

 

 

 

Other comprehensive income (loss), net of tax

 

13

 

(125

)

Ending Balance, December 31

 

(502

)

(347

)

Total Accumulated Other Comprehensive Loss

 

$

(502

)

$

(347

)

 

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Note 15.  Earnings (Loss) Per Common Share

 

A dual presentation of basic and diluted earnings (loss) per common share is required on the face of the Company’s Consolidated Statement of Operations as well as a reconciliation of the computation of basic earnings per common share to diluted earnings per common share.  Basic earnings (loss) per common share excludes the dilutive impact of potentially dilutive securities and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period.  Diluted earnings (loss) per common share is computed using the treasury stock method and includes the effect of potential dilution from the exercise of outstanding stock options and treats unvested restricted stock and performance-based shares as if they were vested.  Potentially dilutive securities have been excluded in the weighted average number of common shares used for the calculation of earnings per share in periods of net loss because the effect of including such securities would be anti-dilutive.  A reconciliation of the Company’s basic and diluted earnings (loss) per common share was as follows:

 

 

 

Three Months Ended
December 31,

 

(In thousands, except share and per share data)

 

2018

 

2017

 

 

 

 

 

 

 

Net income

 

$

12,362

 

$

14,022

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

37,761,176

 

37,066,902

 

Effect of potentially dilutive stock options and restricted stock awards

 

1,351,371

 

1,223,456

 

Diluted weighted average common shares outstanding

 

39,112,547

 

38,290,358

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

 

$

0.33

 

$

0.38

 

Diluted

 

$

0.32

 

$

0.37

 

 

 

 

Six Months Ended
December 31,

 

(In thousands, except share and per share data)

 

2018

 

2017

 

 

 

 

 

 

 

Net income (loss)

 

$

(275,166

)

$

27,279

 

 

 

 

 

 

 

Basic weighted average common shares outstanding

 

37,674,200

 

37,029,483

 

Effect of potentially dilutive stock options and restricted stock awards

 

 

1,058,343

 

Diluted weighted average common shares outstanding

 

37,674,200

 

38,087,826

 

 

 

 

 

 

 

Earnings (loss) per common share:

 

 

 

 

 

Basic

 

$

(7.30

)

$

0.74

 

Diluted

 

$

(7.30

)

$

0.72

 

 

The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share for the three months ended December 31, 2018 and 2017 were 540 thousand and 3.0 million, respectively.  The number of anti-dilutive shares that have been excluded in the computation of diluted earnings per share for the six months ended December 31, 2018 and 2017 were 2.2 million and 3.0 million, respectively.

 

Note 16.  Warrant

 

In connection with the KUPI acquisition on November 25, 2015, Lannett issued to UCB Manufacturing a warrant to purchase up to a total of 2.5 million shares of Lannett’s common stock (the “Warrant”).

 

The Warrant had a term of three years (expiring November 25, 2018) and an exercise price of $48.90 per share, subject to customary adjustments, including for stock splits, dividends and combinations.  The Warrant also contained a “weighted average” anti-dilution adjustment provision.  The fair value included as part of the total consideration transferred to UCB at the acquisition date was $29.9 million.  The fair value assigned to the Warrant was determined using the Black-Scholes valuation model.  The Company concluded that the warrant was indexed to its own stock and therefore the Warrant was classified as an equity instrument.  On November 25, 2018, the Warrant expired and was not exercised.

 

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Note 17.  Share-Based Compensation

 

At December 31, 2018, the Company had two share-based employee compensation plans (the 2011 Long-Term Incentive Plan “LTIP” and the 2014 “LTIP”).  Together these plans authorized an aggregate total of 4.5 million shares to be issued.  The plans have a total of 615 thousand shares available for future issuances.  On January 23, 2019, the shareholders of the Company approved an Amendment to and Restatement of the 2014 LTIP to increase the amount of shares authorized to be issued by 2.0 million shares.

 

The Company issues share-based compensation awards with a vesting period ranging up to 3 years and a maximum contractual term of 10 years.  The Company issues new shares of stock when stock options are exercised.  As of December 31, 2018, there was $14.4 million of total unrecognized compensation cost related to non-vested share-based compensation awards.  That cost is expected to be recognized over a weighted average period of 2.2 years.

 

Stock Options

 

The Company measures share-based compensation cost for options using the Black-Scholes option pricing model.  The following table presents the weighted average assumptions used to estimate fair values of the stock options granted during the six months ended December 31, 2018 and 2017:

 

 

 

Six Months Ended

 

 

 

December 31, 2018

 

December 31, 2017

 

Risk-free interest rate

 

2.9

%

1.9

%

Expected volatility

 

58.4

%

57.4

%

Expected dividend yield

 

%

%

Forfeiture rate

 

6.5

%

6.5

%

Expected term (in years)

 

5.3 years

 

5.4 years

 

Weighted average fair value

 

$

6.52

 

$

9.06

 

 

Expected volatility is based on the historical volatility of the price of our common shares during the historical period equal to the expected term of the option.  The Company uses historical information to estimate the expected term, which represents the period of time that options granted are expected to be outstanding.  The risk-free rate for the period equal to the expected life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.  The forfeiture rate assumption is the estimated annual rate at which unvested awards are expected to be forfeited during the vesting period.  This assumption is based on our actual forfeiture rate on historical awards.  Periodically, management will assess whether it is necessary to adjust the estimated rate to reflect changes in actual forfeitures or changes in expectations.  Additionally, the expected dividend yield is equal to zero, as the Company has not historically issued and has no immediate plans to issue, a dividend.

 

A stock option roll-forward as of December 31, 2018 and changes during the six months then ended, is presented below:

 

(In thousands, except for weighted average price and life data)

 

Awards

 

Weighted-
Average
Exercise
Price

 

Aggregate
Intrinsic
Value

 

Weighted
Average
Remaining
Contractual
Life (yrs.)

 

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2018

 

1,057

 

$

22.46

 

$

2,584

 

5.4

 

Granted

 

73

 

$

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